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Behavioral Economics Issues
Saturday, Jan. 4, 2020
2:30 PM - 4:30 PM (PDT)
American Economic Association
University of California-San Diego
Ambiguity and Beliefs in the Principal Agent Model
A Principal-Agent model in which the principal and the agent are ambiguity averse is examined. A novel role for the optimal contract is to induce a specific partition of the state space for the agent as a means of managing the ambiguity he faces, thereby providing more efficient contracting. In contrast to the standard principal-agent model, the optimal contracts in this environment can be fairly simple and robust to changes in model parameters. For example, the frequently observed step-function compensation schemes can be optimal when the agent is ambiguity averse. This insight has important implications for other fields of research, including security design and asset pricing.
Bayesian Persuasion: Evidence from the Laboratory
This paper presents one of the first experimental studies of Kamenica and Gentzkow's (2011) model of persuasion and a novel experimental framework that can be adapted to analyze emerging theories on information design. It is a study of the strategy adopted by a persuader to manipulate the information environment so as to influence a rational receiver's beliefs and actions. Results show that although senders do take advantage of their ability to manipulate the information environment to serve their self interest as theory would predict, lacking an opportunity to learn they may fail to do so optimally. Given sufficient opportunity to learn, however, the majority of senders select the optimal strategy suggested by the theory. Analysis of individual behavior reveals some systematic deviations from theoretical predictions suggesting the difficulty of learning in this environment.
Measuring Biases in Expectation Formation
We develop a general framework for measuring biases in expectation formation. The basic insight is that under- and overreaction to new information is identified by the impulse response function (IRF) of forecast errors. This insight leads to a simple and widely applicable measurement procedure. The measurement procedure boils down to estimating the IRF of forecast errors and can be used in a variety of empirical scenarios. The framework encompasses all major models of expectations, sheds light on existing approaches to measuring biases, and provides new empirical predictions. We illustrate the measurement procedure with an application to inflation expectations.
Superstitious Belief Versus Nudge as Contract-Enforcing Mechanisms: Evidence from a Field Experiment
Can informal mechanisms help enforce economic contracts in the field? Despite extant affirmative evidence from the laboratory, we conduct a natural field experiment in a real marketplace to test if the lab results generalize qualitatively in the field. Due to the lack of contract-enforcing institutions (monitoring, detection, punishments, reputations, etc.), our marketplace experiences widespread contractual breaches by the sellers after bilateral agreements over the price and quantity are reached. In this setting, we explore two mechanisms: a buyer-driven nudge in the form of an ethics reminder before the purchase and rendering salient sellers' superstitious belief about the first transaction of the day. In a within-seller design, experimenter-buyers make scripted purchases in Baseline, Nudge and Superstition treatments. We discover that the sellers behave strikingly honestly when the superstition is made salient whereas nudge significantly decreases dishonesty, albeit the effect is markedly weaker than under Superstition. Although we find that the prevailing superstition is most effective in mitigating dishonesty and boosting contract enforcement, making normative demand through a nudge is also observed to push the breaching party substantively towards the agreement.
Why Do We Procrastinate? Present Bias and Optimism
A large body of research has shown that procrastination can have significant adverse effects on individuals, including lower savings and poorer health. Such procrastination is typically modeled as the result of present bias. In this paper we study an alternative: excessively optimistic beliefs about future demands on an individual's time. Our experimental results refute the hypothesis that present bias is the sole source of dynamic inconsistency, but they are consistent with optimism. These findings offer an explanation for low takeup of commitment and suggest that personalized information on past choices can mitigate procrastination.
D9 - Micro-Based Behavioral Economics